Environmental Exposure: Flood Risk in the Oil & Gas Industry

There has been much discussion regarding the increasing frequency and intensity of storms around the world. While both underwriters and insurance buyers are concerned with exposure to potential catastrophic losses from these storms, the focus has been on property damage to buildings and facilities. Unlike property insurance, environmental insurance is typically not a catastrophe-exposed line of coverage. However, the Colorado floods demonstrated that potential environmental releases from catastrophe storm events should be considered during the underwriting process.

Historically, there have been environmental claims from pollutant releases caused by catastrophic storms. Hurricanes and other storms have caused releases of pollutants that resulted in claim payments on environmental insurance policies. Environmental underwriters expect water intrusion into multi-unit residential and commercial structures, and the resulting mold growth, as the most likely claim scenario resulting from an intense rain storm or hurricane.

To date, mold claims have been responsible for most of the environmental claims arising from these storm events. There have also been environmental claims resulting from releases of petroleum products. While these have been fewer in number, they have the potential for greater severity.

There has not yet been an environmental catastrophe event resulting from wind or flood, but given recent events, underwriters may want to include evaluation of flood exposure as a standard component of the underwriting process, particularly when evaluating oil and gas accounts.

Underwriters may want to include evaluation of flood exposure as a standard component of the underwriting process, particularly when evaluating oil and gas accounts.

2013 Colorado Floods

In September 2013, portions of Colorado experienced a “100-year flood” caused by more than 15 inches of rainfall in eight days. In Boulder, Colo., walls of water up to 20 feet high ran down the streets of the city and surrounding areas. The flooding destroyed or damaged nearly 20,000 homes and 50 bridges, and forced more than 10,000 people to evacuate the region. Ten people were killed.

There were more than 51,000 operating oil and gas production wells in the region affected by the storm. The flooding caused damage to oil and gas operations, including ruptured flow lines and storage tanks. In addition, well operators were forced to “shut in” (i.e., temporarily stop production) wells due to the flooding.

The Colorado Oil & Gas Conservation Commission (COGCC) tracked the effects of the flooding and collected information on the number and types of releases that took place in production areas. Releases of environmental contaminants included crude oil and produced water. Produced water is water in the geological formation where production activities are taking place that is present in the crude product and must be separated out when the crude product reaches the surface. Produced water typically contains organic contaminants, brine and in some formations, naturally occurring radioactive matter.

As of Oct. 9, 2013, the COGCC identified the following notable releases and wells shut in as a result of the flooding:

15 releases of oil totaling 43,134 gallons;

17 releases of produced water totaling 26,385 gallons; and

1,900 wells shut in out of a total of 51,000.

Oil and gas operators reported that for the most part, the released oil and produced water were washed away with the flood waters. In an effort to identify broader environmental effects of the flooding, the COGCC tested eight rivers in the flood plain, but the results showed no impact from oil and gas operations. In addition, there were no integrity failures (i.e., breaches of the well casing that could release contaminants below ground) of any wells as a result of the flooding. Interestingly, tests showed that at least three rivers were affected by overflows of raw sewage, as evidenced by higher than normal E. coli levels.

Media and environmental activists continue to focus on the potential effects that producing wells may have on the environment, including during catastrophes such as the Colorado flood. The evidence, however, points to above ground operations, including flow lines, impoundments and storage tanks, as the major exposure to releases of contaminants. In Colorado, flow lines and storage tanks were the most affected areas of oil and gas exploration operations.

Initial estimates do not indicate substantial amounts of environmental cleanup are required. It is possible that the volume of flood waters diluted the contaminants to a level where they were not detectable.

There are two caveats to this conclusion. First, contamination could have been deposited in other areas and has yet to be discovered. Second, the data is incomplete with COGCC inspections of approximately 20 percent of affected wells and associated production areas still to be carried out as of Oct. 9, 2013.

Looking Ahead

What can be done to be better prepared for potential catastrophic flooding in oil and gas exploration areas?

Environmental underwriters should consider a review of well pad locations, as well as tank batteries, compressor stations and flow lines. An overlay of proximity to rivers and flood zones should be incorporated into environmental engineering reviews that form the basis for an environmental underwriter’s exposure evaluation.

Well pad location coordinates can be loaded into a geographic information system (that effectively merges cartography, statistical analysis and computer science technology) to provide a map of potential flood exposures.

State-of-the-art directional drilling technology can allow exploration and production companies to assess the viability of drilling vertical wells outside of a flood plain and then drilling horizontally to reach the product directly below the flood plain.

Environmental underwriters and insureds should review flood-exposed operations to ensure that well pads and operational areas are bermed sufficiently to prevent not only contaminants from being released onto the oil and gas lease area, but also flood waters from entering operational areas.

Storage tanks and flow lines should be reviewed for their ability to withstand the impacts of flooding, especially older assets that may be “grandfathered-in” with respect to current structural requirements.

Finally, insureds should include procedures for flood response in their emergency and contingency plans.